Fiscal extremists will hurt the economy

On the battleground of education and disability reform, the push for a budget surplus at all costs risks undercutting Australia's future prosperity.

We are in danger of confusing the parlous state of the federal budget with the state of the economy more generally – if both are assumed to be falling apart, the nation as a whole will make the wrong investment decisions.

In the public sector, the big risk is that two reforms that are already long overdue will be shelved indefinitely – the DisabilityCare package and the Gonski school funding boost.

Many commentators are saying that while we all want these reforms, for reasons of social justice, if there’s no money to pay for them, they’ll just have to wait. That sounds reasonable, until the rationales of the reforms are revisited. They are economic reforms, not just guilt-driven social justice crusades.

Boosting workforce participation by delivering better disability services is a key part of DisabilityCare. So too is reducing future public costs through early intervention programs – which are all the more important as Australia’s demographic profile slowly skews towards old-age.

Likewise the Gonski reforms, which aim to deliver a generation of globally competitive students to the tertiary or TAFE systems, or directly into an up-skilling workforce.

The cost of not acting on either of these policies must be weighed against the benefit of the reforms.

As the chief executive of the Australian Council of Social Services, Cassandra Goldie, said yesterday: “We all understand the current budgetary constraints, however, this must be a priority in the coming budget. We can afford the $1.8 billion. In fact we cannot afford not to do it.” 

In the past two days, both ACCI and the BCA have warned against a hit on company taxes in the forthcoming budget which they both say would create a drag on profits and taxes, and therefore be counterproductive to balancing the budget in the medium term. Agreed. One might add to that the 1.5 per cent levy Tony Abbott plans to slug big business with to fund his paid-parental leave scheme.

On the expenditure side, ACCI chief economist Greg Evans argued two days ago: “We now need a root-and-branch review of spending and a more rigorous approach to the evaluation of government programs such as Gonski and the National Disability Insurance Scheme ... Our number one economic priority must be a return to sustainable budgets otherwise there is no scope for delivering the major economic reforms required to deliver productivity improvements.”

But that view does not give enough importance to the productivity improvements Gonski and DisabilityCare are expected to deliver longer term.

As Julia Gillard thundered across the dispatch box in parliament in March, Australia’s future must be a “high skill, high wage economy” and “if you make the wrong decisions, you won't get there."

The irony is that while there are growing calls to reassess whether we can afford Gonski and DisabilityCare, there is not enough noise being made about raising or broadening the GST (which could easily pay for both, as Jessica Irvine has pointed out – See Greeting the tax that must not be named, April 30) or scrapping the economic lunacy of negative gearing in residential property.

Both are in the too-hard basket, so the government is set to announce an increase in the Medicare levy, by 0.5 per cent of income for high earners instead. Much easier to sell.

Why that’s called a ‘levy’ rather than a permanent increase in the top marginal tax rate is not at all clear.

This all adds to the hugely confusing picture of Australia’s tax system. The ‘progressive’ income tax structure, which all sides of politics support, is really not what it seems.

Those at the highest marginal rate do not, effectively, pay the top marginal rate due to the tax dodges such as paying disbursements to family members through family trusts, or by negatively gearing loss-making property investments. At the same time, the government wants to claw more back through a levy.

Would it be radical to suggest that we set a realistic progressive income tax scale and actually stick to it?

It's time to face facts – the deterioration in the federal fiscal position has been more rapid than anyone expected (including the Coalition, which must factor the same revenue writedowns into their budget plans); a company tax hit would be counterproductive; and scrapping Gonski and DisabilityCare will hurt the economy (and hundreds of thousands of Australians) down the track.

That's why Stephen Koukoulas was absolutely correct yesterday – in this set of circumstances deficit spending is the only option for keeping economic growth on track and, with some luck, returning to fiscal comfort a year or two down the track (The budget deficit is just a stone in the shoe, April 30).

The extremes of tax hikes or slashing spending will do more harm than good.